Recall that groups exist in order to supply their members with some desired joint good. This good can be attained only if members comply with various rules that are designed to assure its production. There are two alternative means of obtaining compliance with these production rules: it can be secured either through compensation or through obligation. In some groups ‒ for instance, firms ‒ members are compensated (in wages) for the time that they spend complying with production rules. In general, members would always prefer to be compensated for complying with production rules, because this does not diminish their own assets. Since the wages that motivate compliance must themselves be produced, however, compensation is feasible only in groups that produce marketable goods (and services) for the consumption of nonmembers.1 General Motors can largely rely on wages to fill its assembly line because revenue is generated from the sale of vehicles and other products; since the Bruderhof is not primarily interested in marketing some commodity, it cannot rely on wages to motivate compliance among its members.
In contrast to groups whose rationale is the marketing of commodities to nonmembers, those that are principally formed to consume joint goods must rely on obligation to secure compliance with production rules. The greater the extensiveness of obligation, the greater the tax that members must pay to consume the joint good. Yet (according to the law of demand), the greater the price of a given good, the lower the demand for it. Why then do we find groups whose members consent to highly extensive obligations?
Such groups must provide goods of great value to their members. A rational member will seek membership in a group only if the benefit derived from access to the joint good exceeds the cost of the obligations ‒ that is, the member’s share of the costs of producing that good. This reasoning has one immediate implication: the benefit derived from membership in obligatory groups must generally exceed that of membership in compensatory groups. Why must this be so? Because the members of obligatory groups are expected to bear a cost (compliance with production rules) without a corresponding compensation. This can be explained if, in contrast to firms and other compensatory groups, obligatory groups produce immanent goods ‒ those that directly satisfy their members’ utility (by increasing their sense pleasures, happiness, and so forth). General Motors workers do not join the firm because they like cars, any more than the people who work in Silicon Valley like silicon chips. Most workers join firms because of their interest in wages, not in the commodities that these firms produce. Since workers do not get to consume the goods that they jointly produce (like nonmembers, they must purchase the goods if they want them), they must be compensated for the time spent in complying with the firm’s production rules.
The people who join a group that produces some immanent good for the consumption of members (entertainment, sense pleasures, enlightenment, and so forth), however, do have an interest in helping to provide it without compensation, for utility is its own reward. Hence, obligation is likely to play the predominant role only in groups whose rationale is the production of immanent joint goods.
Yet the extensiveness of obligations also varies among groups that supply immanent goods. After all, Orthodox Jews, Mormons, and members of the Communist Party face far more extensive obligations than Reform Jews, Unitarians, or members of the Republican Party. What accounts for systematic differences in the extensiveness of obligations across groups?
It is reasonable to suspect that the extensiveness of a group’s obligations has something to do with the cost of producing a given immanent good ‒ that is, with the sum of all the labor, capital, and other necessary inputs. If security is more costly to produce than the entertainment generated by a weekly poker game, then we would expect the obligations of the protective association to be far more extensive than those of the poker group. Thus, the extensiveness of group obligations ought to be determined in part by the cost of producing the good in question. Evidently, there must be some minimal level of obligation that is required to produce a good in groups of a certain size, but how can the members ever know what it is?
Suppose, for the sake of argument, that the good is produced under the frictionless market conditions specified in conventional neoclassical economic models. In this case competition among rival producers of the good enables members to determine the lowest cost of producing it and thereby to arrive at minimally extensive obligations in the long run. To the degree that there are many different sources of similar or comparable goods in the immediate environment; that members have perfect information about the availability, quality, and cost of all close substitutes; that they have complete freedom of mobility and face no barriers of exit or entry into alternative groups (implying zero moving costs between them); that exchanges between members of the group are impersonal; and that enforcement is costless, members will tend to adopt obligations that are just extensive enough, and no more than are necessary, to provide a given quantity of the good.
It is easy to show why this minimal level of obligations will be realized. Imagine the problems that the members of a protective association might have deciding how extensive their corporate obligations should be. Assume that all pastoralist members can receive an adequate amount of security from the protective association by contributing 10 percent of their total assets. This is a new venture, however, and the pastoralists have no idea how much it will ultimately cost to provide themselves with adequate security. Perhaps most are willing to contribute as much as 20 percent of their assets to attain it. Even if they initially agree to a 20 percent contribution, the rate will not remain at this high level for long. If they could obtain adequate security at less cost (say at 15 percent) by joining (or forming) a different protective association, then it would be rational for members to desert the first group and “vote with their feet.” (Note that in this case the availability of free grazing land and portability of their tents mean that the nomads’ moving costs are negligible.)
This out–migration will stop only when the initial group lowers its rate to that of its competition, namely 15 percent. Then suppose that another group offers security on the basis of a 10 percent contribution. (We happen to know that this is the lowest possible rate, but this information is unavailable to the pastoralists.) This leads either to wholesale migration or to a downward readjustment of the initial group’s rate. What will stop the process? Suppose another protective association lowers its rate to 5 percent. A host of new members will join. But soon they will discover that the association is unable to live up to its promises, for a 5 percent contribution is too low to provide adequate security. In the wake of this group’s failure, everyone will rush back to join the 10 percent group. In time, then, the competition between rival protective associations (or rate experimentation within one group caused by the threat from potential new producers) will induce all groups to offer the same quantity of security (for a membership of a given size) at roughly the same, or equilibrium, rate of contribution.2 Whatever the immanent good may be, in this world of frictionless markets groups will provide it to their members at minimal cost ‒ that is, with minimally extensive obligations (Brennan and Buchanan 1980: 172).
Since rational egoists always seek to minimize their costs, why can’t minimally extensive obligations be arrived at in the absence of fully competitive markets? After all, members have an incentive to find ways either to reduce costs (if their initial estimate of the production cost was too high) or to increase costs (if their estimate was too low). Even though they seek to minimize their obligations, there are at least three reasons why members are unable to do so in the absence of frictionless market conditions. In the first place, each collective consideration of the level of obligations entails time and other costs of decision–making (Buchanan and Tullock 1962; Buchanan 1975), and these costs rise geometrically with the size of the membership. Rather than incurring such costs, members will settle for greater than minimal obligations. In the second place, to the degree that members place a high value on continued access to the immanent good, they may be reluctant to risk suboptimal provision of it (this may account for the sanctity of the defense budget in the eyes of American voters). Finally, if there are no alternative sources of the same good, then initial members may levy higher obligations on all subsequent ones and consume the resulting surplus themselves. This will create a two– (or multi–) tiered tax structure within the membership and raise
